Inventory Management - One Size Does Not Fit All

If there is one great myth in inventory management it is that one single technique will solve all inventory problems. Not that people believe that one technique will solve all problems in all situations but that in any given company one approach is all that is required to manage all inventory.

For the inventory manager this is very attractive as it means that there is only one approach to manage. For the software vendor, consultant or advisor it means only one solution to sell.

There is a wide range of techniques and approaches that people use to manage inventory. These include JIT, MRP, DRP, SCM, Risk Management, safety stock and EOQ?s Sometimes they are used on a stand alone basis and sometimes in conjunction with each other. All are worthwhile techniques when used appropriately.

Problems arise however when the approach to identifying the appropriate solution starts by looking at the solution rather than the inventory. This approach starts from the assumption that because solution x works at company y it must be good. Or because the software suits our enterprise wide planning system it is appropriate. In fact it is often assumed that inventory software packages are much of a muchness. Have you ever heard someone say ?and it has an inventory module?!

The fact is that not all inventory is the same and consequently not all inventory requires the same approach to management. Without trying to be exhaustive it is easy to identify that some inventory is made to order, some is made to stock, some is perishable, some have characteristics that change with time, some are part of assemblies and sub-assemblies and some are stand alone items. These, and many other variables, lead to a huge number of different requirements for inventory management.

While the differences between inventories in different industries are well documented (for example, the requirements for managing inventory at a large retailer will be different to managing in-process inventory at a petro-chemical plant) what is not widely recognised is that the requirements for inventory management across a single business can vary significantly.

The single biggest error made in inventory management today is to select an inventory management technique and apply it universally across a business. The ?one size fits all? approach can lead to significant inefficiencies in the results of inventory management. This might not be an ?out of stock? as that situation is always dealt with urgently. More likely the result will be the holding of excess inventory and tying up valuable funds unnecessarily.

A better approach to inventory management is to start by looking at the inventory rather than the solution and identifying the characteristics of each type of inventory being held. When this is done, an approach that is appropriate to the demand, supply and cost characteristics of the inventory can be selected and the inventory holding optimized for its characteristics.

Consider a manufacturer that has a total inventory made up from raw materials, work in progress, finished goods, a distribution network and engineering spares. Applying a universal mindset or solution across all of these inventory types is unlikely to deliver an optimal result. For example, dealings involving suppliers (as for raw materials and engineering spares) provide a different range of opportunities compared to internal supply situations (WIP) and even finished goods. The ability to forecast, the ability to control the supply chain, the ability to source on consignment, the requirements for buffer stock, the impact of a stock out all vary. Unless you allow the flexibility to pursue opportunities related to different inventory types your business is likely to be over investing in inventory.

Inventory management is about more than just logistics and getting the right thing in the right place at the right time. It is also about the efficient and effective use of capital. Taking a singular approach to managing all types of inventory without fully considering the different characteristics and opportunities of that inventory leads to overstocking and obsolescence and the waste of capital resources that might be better directed elsewhere.

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICR?06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com

Better Practice Inventory Management

People are always searching for ?best practice?, somehow believing that there is a silver bullet solution that will cure their inventory problems. The problem, of course, is that what is best practice in one country/industry/business might not be best practice in another. In any case, the exalted ?best? practice might just be too much of a jump for many people to take or indeed may not be economically viable.

Interestingly, though, in my work, the question that I am most often asked is, ?what do I do with all of this excess inventory?? My answer, of course, depends upon the nature of that inventory, what it is, how old it is etc. But obviously the best thing to do is create less of the inventory in the first place!

Some might think that this requires best practice and is therefore difficult to achieve but I would argue that this really is more achievable than people think. Putting in place the right processes, polices, measures and reporting in order to limit inventory purchases to those items that are most likely to be used/sold and in the right quantity, is as important or perhaps a more important task than clearing out the old stock. This can be achieved by understanding what works well for others rather than what is best practice. I think of this as better practice.

With that in mind I recently had the opportunity to interview more than 30 people, across a dozen companies, in all Australian states and New Zealand, who were all associated with inventory creation in one way or another. There were General Managers who make the occasional big decisions that create inventory. There were inventory managers who take the day-to-day actions. There were purchasing people who order the stuff and sales people who provide forecasts. Each of these people has a role to play in the creation of inventory but interestingly only the inventory managers acknowledged that role explicitly. The result of those interviews does not constitute best practice but I think that they give some insight into better practices.

These interviews were conducted on behalf of a client so I am unable to give you all of the detail or the quantitative results. But I do have permission to tell you what we deduced in a qualitative fashion.

During the interviews we identified the following similar practices that were consistent between the companies that performed well.

1. Inventory decisions (range and quantity) were made at a local level. The locals were considered best placed to understand local conditions and requirements and therefore better able to get the inventory mix right. They had a better handle on forecasting because they were closer to the customer or demand. Centralized systems often missed the subtle changes or inside knowledge that helped stop the ordering of items (for example) when usage had changed but had not yet been flagged in the system.

2. Requisition systems were used to order items through centralized purchasing. This approach creates efficiencies in procurement and provides greater control over terms of business and logistics. The purchasing people were concerned with all the purchasing issues not just the availability.

3. Inventory items and codes were created centrally. This was used as a means of controlling the SKU count. Companies that did not do this experienced the ?death by a thousand cuts? associated with managing a long tail of low value SKUs

4. The better companies had moved to central ordering after trying local ordering. They found that this change had a positive impact on their inventory investment. The point is that they tried it one way and made a change and that this experience was consistent.

5. Inventory management systems and practices were standardized. Each location or department followed exactly the same process. They used the same rules for determining what they should and shouldn?t buy and had the same authorities, responsibilities and accountabilities at similar levels. Kind of like McDonald?s only not involving hamburgers! This didn?t remove individual decision making or initiative it just meant that the rules were consistent.

6. Most of the better companies had an inventory process ?champion? to work on continuos improvement and maintaining standardization. This person did not manage the inventory or ?own? it any way. This person ?owned? the process. I liken this to having a Quality Manager; they don?t own the production just the process used to control quality. This was not necessarily a full time role

7. Inventory was reported at a local level using local balance sheets. Local reporting and highlighting of inventory was seen as an important way to create visibility and therefore ownership.

8. The better companies were quite aggressive in inventory management, setting and achieving aggressive targets rather than ?achievable? targets. The better companies did not just want to manage availability they saw managing the cash investment as equally important and therefore set targets aimed at minimizing the cash investment without jeopardizing availability.

9. Internal interest charges were included in departmental P&L reports as a means of providing immediate feedback on the impact of additional inventory (these items were reversed before any corporate reporting). This helped make the cash investment important at the senior levels that had to report on their P&L Statement on a monthly basis. Companies that didn?t do this found that reporting a good profit was used to justify an over investment in inventory (that is an investment that did not really contribute to the profit). This approach forced them to mange both cash and profits.

10. Slow stock was identified at a higher stock turn level in the aggressive companies than it was in the others. This was seen as a way of highlighting the approaching ?cliff? of obsolescence and was used as a way to force action before accounting rules required items to commenced being written down.

11. Virtual warehousing was used to separate stock purchased for different purposes. This is where a different warehouse code might be used although the material was in the same warehouse as other stock. This was particularly useful when stock was bought in especially for one off projects or events such as capital works or shutdowns. This approach enabled a heightened level of visibility of who had bought what and prevented mistakes being hidden in the general inventory.

Obviously the sample for this survey was small so the results are open to interpretation. However, the actions listed are not so radical that they cannot be implemented by almost everyone that is seeking ways to improve their inventory management. The 11 actions listed above were consistent across a number of the companies that were ?doing well? and were noticeably absent in the others.

So, assuming that you want to improve your inventory results the only thing stopping you from adopting some or all of these actions is the fear of either change or loss of control. Of course you could just keep looking for ?best practice? but now that can only be seen as an excuse to do nothing!

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICR?06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com

Why Your Current Approach To Inventory Management Is Not Good Practice And Is Costing You Money

Businesses around the world spend millions of dollars on software and inventory management systems in an effort to maximise their return on investment (ROI) from inventory. Until now even the most sophisticated of these systems left businesses way short of best practice. In fact most of these systems institutionalise excess inventory.

The problem is that most software relies on optimisation and this limits the opportunity to reduce inventory because it ignores external influences. Software can only optimise the values it has, not what could be.

World's best practice inventory management demands that the ?management system? is optimised not just the inventory. Most inventory software takes today?s data and runs an algorithm to optimise holdings. What they miss are the changes in the management system that could further reduce the total level of investment. This flaw makes software systems self-limiting in their results.

Inventory management is much more than just the software system. Inventory management is the combination of know-how, process, measures and reporting that together provide the opportunity for maximizing availability while minimizing cash investment.

The five reasons why your inventory management is not best practice and is costing you money are:

1. The Responsibilities Are Misaligned

The people that make the day-to-day decisions will typically not be responsible for the working capital outcomes; they will be responsible for availability. The problem is that if you run out of stock all hell breaks loose but if you overstock there is no repercussion. This is especially the case with indirect inventory that is not subject to the usual planning scrutiny. Given this, what do you think most people do? That?s right, they over stock!

2. The Optimization Is Incomplete

Sophisticated software can track all sorts of data and in many cases the software can make optimization decisions based on that data. This can reduce your inventory but it is self-limiting. The problem is that software optimizes only on known data and ignores process and behavioural changes that can impact that data. This is software optimization not system optimization. The software should only be a tool within a bigger process of optimization.

3. It Is Managed Reactively

Inventory is often seen as ?set and forget?, that is, once the item is optimized for the current situation the requirements are not systematically revisited. It is often only when there is a ?cash crunch? or some other emergency that action is taken. Yet, even indirect inventory can represent millions of dollars of investment and deserves frequent attention. When action is taken it usually addresses the highly visible items rather than the real ?cash burners?.

4. There Is A Significant Time Lapse Before Problems Emerge

The number one question asked about inventory is ?what do I do with slow moving or obsolete stock?? Depending upon the accounting policies in your company this stock has taken 3?5 years to reach the point where that question is asked. By this time it often seems irrelevant to revisit the original decision or processes that produced this result. No one would accept this approach to quality management! No one ever asks ?how do I prevent the accumulation of slow moving or obsolete stock??

5. It Is Painful To Fix And Easy To Ignore

In most cases the removal of obsolete inventory will result in a ?hit? to the profit and loss account. However, if a reason can be found to justify it for another year then few will argue. Eventually someone is going to have to make a decision and it will be painful. For this reason, obsolete inventory decisions are often driven by the opportunism of results reporting rather than good management principles.

To truly achieve best practice your organisation must review these issues and develop systems that will minimize their impact or eliminate them altogether.

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICRTM06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com

World's Best Practice Inventory Management

In almost every endeavour it is difficult to determine what constitutes ?best practice?. Businesses around the world spend millions of dollars on software and advisory services and often don?t know whether they are ?best practice? or just somewhere in the pack.

Many companies will say, ?why does it matter just as long as you keep getting better?? The stark reality is that inventory requires the investment of cash. The items need to be purchased and stored and this ties up cash. This working capital can be a significant burden for many companies and if freed up can provide significant cash resources that can be used for other more productive purposes.

For many companies the key issue is availability and so long as they have an item when it is required they care little about the cash investment. However, this approach will not maximise your ROI and, in almost all cases, cannot be financially justified on any level. This is because the excess inventory investment that this approach generates provides little or no value to your business. The excess is invested in inventory that does not move or becomes obsolete.

World?s best practice inventory management demands that the ?management system? is optimised not just the inventory. It is in this field that best practice can be both easily identified and readily achieved.

Each level on the ladder to world?s best practice provides a greater degree of control and management but is only at Level 5 ? System Optimization that the management system is optimised. By reaching this level companies can reduce their inventory investment, freeing up cash, AND achieve their desired availability levels.

The five levels to world?s best practice inventory management are:

Level 1 ? Ad Hoc: Purchases are made on an ?as needed? basis. At this level there is little control necessary as inventory is expensed when purchased and used immediately. While this may seem to reduce the cash investment it may not reduce the total cash expenditure. This approach can only be viable if the items are available ?instantly? and the cost of a ?stock out? is negligible.

Level 2 ? Storage: Inventory is expensed when purchased and stored for use but not strictly controlled. Similar to above except that items are stored because of the cost of a stock out. This approach appears to solve one problem but it raises two others. Firstly, total expenditure is likely to increase as items are purchased in ?economic quantities?. (See my free e-book ?5 Myths of Inventory Reduction?) Secondly, without controls there is little opportunity for review and development.

Level 3 ? Capitalisation: Inventory is capitalised and subject to some level of control, either manual or software based. This approach is by far the most popular as it appears to provide the required mix of availability and control. Unfortunately, most organizations use their software solely for counting and accounting. There is a strong reliance on human calculation of inventory requirements but often little review of outcomes. The result is likely to be good availability but a significant over investment in inventory and high levels of obsolescence.

Level 4 ? Software Optimisation: Inventory is capitalised and stock levels are optimised based on a risk/return algorithm. This is the basis of most software solutions. Most software packages will incorporate the ability to automatically adjust the required stock levels based on the history of demand and supply. Very few companies actually use this feature because they know that they cannot trust the results. This is not due to a software flaw but because the supply and demand may not represent typical usage. (This is explained further in the book Smart Inventory Solutions.)

Level 5 - System Optimisation: Inventory management minimises the overall cash investment without an increase in risk. This is world?s best practice. At this level, all of the factors that influence the actual inventory investment are reviewed on a regular basis. This review is manageable because it is limited to the ?vital few? items that have a real impact on the level of investment. Inventory levels are adjusted to take account of changing needs and this minimizes the likelihood of obsolete inventory.

Any company that already has the software required for Level 3 can achieve Level 5 ? world?s best practice. What is needed is the know how, policy development, measures and reporting required to take a company to Level 5, not more software. Once these key issues are addressed you are implementing a true management system. Software only goes to level 4, it is the management system that provides the bridge to Level 5.

For more information visit http://www.InitiateAction.com

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICRTM06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com.

Inventory Management - Good Practices And Benefits

In every kind of business, inventory management or management of the inventory consists of a series of processes on the multiple functions with reference to the tracking, handling and managing of goods and materials that are held in stock.

Efficiency in effective inventory management will always give a competitive edge to the business, regardless of its nature. With effective control and management over inventory stock, as well as accurate visibility and fast efficient fulfillments, comparative pricing can be given on a customer-to-customer basis.

In addition to cutting down on operating costs, it will also bring satisfied customers back for more businesses in the near future. However, modern day management of the inventory is usually not as simple as the contemporary practices of just keeping abreast with inventory standards and expenditures.

Most businesses, especially those in the process and manufacturing industries, will require varied sets of both simplified as well as complex integrated inventory management controls. Such regulations are streamlined for effectiveness in compliance and distribution as well as making provision for further improvement on software and other protocols.

Primarily, the first and most important step to commence in inventory management is to acquire accurate data in terms of facts and figures. Next, a set of rules and regulations is set up to protect and guard the information efficiently. Such information may become a crux factor in the improvement of inbound operations, strategies and productivity.

In addition to the physical monitoring of materials being moved into and out of the stockrooms and drawing up reconciliations of the inventory balances, other tasks involved in inventory management may include tracking and reporting of replenishment techniques, analysis on the actual and projected inventory status as well as setting periodic targets and re-engineering the execution framework.

Although having proper management of the inventory may create a great difference in attaining and retaining a competitive edge in the sales markets for certain products of any businesses, it remains an integral and essential effort of a company to reduce its inventory management costs.

As a result, several computer software companies have since developed a standardized set of comprehensive inventory management systems to help businesses control and manage their inventory stock.

Aside from certain specialty features, the requisite module should be able to integrate into the pre-existing software system of the business. In addition to providing a quick and easy access to detailed inventory and ordering information, the new inventory management software should also give accurate and timely data.

Although the inventory management system is a beneficial tool, there are some basic and extremely significant points to ensure an effective and proper flow.

These will include good practices like making accurate entries on every stock receipts into the computer, setting up a replenishment strategy on all items in the stock houses and drawing up specific guidelines on the control of excess inventory as well as on-going dead stock. Such effective inventory management habits will give any kind of businesses a superior competitive advantage over their competitors, especially with an easy-to-use stock analysis tool that delivers quick and accurate information.

Ske Chay of www.trade-opportunities.com Providing some comprehensive information on inventory management at www.inventoryanalytics.com

Inventory Management

Inventory Management when implemented correctly, saves your company time and money! Keep track of your company's products and materials and know not only exactly what you have, but exactly where it is, how old it is, how much you paid for it, where it came from, where it is going and more.

Inventory Management is an ongoing process of keeping track of everything needed to run your operation and keep it running. Proper Inventory Management will keep your business flowing from the time an order is placed right down to the point your product gets into your customer's hands. Track your materials, your products during manufacturing, your ready to ship products, and your products in transit and on store shelves.

With today's technology this can be accomplished right from your desk! No need to go out and count everything anymore! Today we have bar code scanners to read labels on boxes of supplies and finished products. We have RFID Tags to track our products, shipments, supplies, orders in transit and more. This new technology allows us to even know where the final product ends up right down to the street and house number where the final user resides!

RFID is playing a bigger and bigger part in today's Inventory Management. From drug stores, retail outlets, libraries, and even credit cards to name a few, this RFID technology will soon be used to track people with their diver's licenses! RFID Tags are found in almost every product already and more products every day are using RFID Tags and RFID Readers. These RFID Readers are hooked up to Inventory Management Software that allows the user to track it during every step of the manufacturing process and depending on the method of delivery, tracks it to the end user.

Today's Supply Chain Inventory Management Software is just incredible with everything it can do! What i huge time saver and asset for businesses. Microsoft is even getting in on it with their Great Plains Inventory Management Division. They strive to give companies the best possible Inventory Control along with real time Inventory Information. This helps to reduce the cost of doing business and saves companies time and money. The Inventory Management Software in use today does several important things. It prepares invoices, keeps an up to date database of your clients, automatically reorders stock (if desired), maintains the balances of your inventory and many more crucial time saving functions.Inventory Management Today, Engineering Today, as well as Warehouse Spot where he provides detailed and informative articles, tips, and advice on Inventory Management along with other great Manufacturing and Storage Information.

Inventory Management Software

Effective management of finished product inventory is quite essential for running a business efficiently and profitably. Inventory strategies and decisions become particularly important in businesses where inventory costs form a sizeable part of total marketing costs.

Carrying inventories becomes inescapable in most businesses, because the producing activities and consuming activities take place at different times, in different locations and at different rates. Inventories are made up of several elements: operational stocks kept for meeting the ready demand at different consumption centers. Some stock will be in transit at any given point of time, while other stock will be awaiting shipments. Finally, there are kept for meeting emergencies. All these make up the total inventory.

While discussing inventory management software, it is important to keep an eye on the elements of inventory costs. A variety of costs are incurred in carrying the inventories. They include interest on capital tied up in the inventory, warehouse rent, staff salaries, insurance, rates and taxes, stationery, postage and communication charges, administrative overheads, costs of handling, unloading and stacking, loss due to damage and deterioration while on storage and cost of order processing.

In businesses where the turnaround of inventories is rather slow, interest on the capital tied up in the inventory becomes the most significant element of the total inventory carrying costs. In fact, inventory cost causes the most worry to manufacturers today. Increased competition has resulted in the accumulation of stock in a number of industries. Inventory carrying costs are on the increase not merely because of increased level of inventories. Every increase in the price of the products pushes up the inventory carrying costs as the value of the locked up product goes up in the process. Similarly, every increase in the interest rates also pushes up the inventory carrying costs.



Home Inventory Software provides detailed information on Home Inventory Software, Inventory Accounting Software, Inventory Management Software, Inventory Software and more. Home Inventory Software is affiliated with Fleet Maintenance Software Reviews.

The Bargain Hunter's Key To Incorporate A Business

If you are a small business owner, you may have considered at one time or another whether to incorporate your business or not. Sure, you are tempted by the tax advantages and risk protection that incorporating a company brings, but the costs of a traditional incorporation with an attorney can be prohibitive.

Well, times have changed, small business owner! It is time you reconsider incorporating your business because the Internet has made the whole incorporation process a lot simpler and a lot cheaper.

Incorporate a Business ... or Not?

One of the most important decisions that you will have to make as a business owner is how your company should be structured. This decision will have long-term implications so you'll want to be sure that you are well-informed when you select the type of ownership that is right for you. When making the choice, you will want to consider the following:

* Your vision of the size and nature of your business.
* The level of control you want.
* The level of structure you are comfortable with.
* The business' vulnerability to lawsuits.
* Tax implications of the various ownership structures.
* Expected profit (or loss) of the business.
* The level of investment and reinvestment of earnings into the business.
* Access to income out of the business for yourself.

Did you know - According to a 1997 report of the U.S. Census Bureau, 17 million small, non-farm businesses in the US comprised 99.7 per cent of all employers, employing 52 percent of the private workforce and approximately 51 percent of sales. Small business-oriented industries provided 11.1 million new jobs between 1994 and 1998, which was virtually all of the new jobs created during that time. As history has dictated in the past, small businesses continue to be the most likely source for generating jobs and opportunity, nearly 67 percent of first jobs and 55 percent of innovations.

Just a Click Away

You may find much of what you need to incorporate a business with just a few clicks of your mouse. For instance, many online sites now offer sample articles of incorporation forms or templates for a nominal fee. Simply go to your favorite search engine and search for ?incorporation template,? ?incorporation form,? or ?sample articles of incorporation.? You?ll find a number of choices with prices ranging from free for sample ?articles of incorporation? to $50 for a customizeable template. Although the price may be right, be advised that this satisfies just one part of the process when you incorporate a business. To be sure, it does not address filing fees (how much and where to file), franchise fees, whether you need a business license, how your state treats foreign corporations, etc.

Alternatively, once you decide in what state to incorporate a business, all you need to do is visit the Secretary of State section of that state?s government website. Most of these websites have sections called Corporate Bureau, Corporation Commission, Bureau of Corporations, or something similar. There you will find the forms you need for incorporating a business along with complete instructions on what is needed to incorporate a business in their state. And many states now offer online incorporation! What?s easier than that?

To incorporate a business can be an overwhelming decision for many business owners, but it is often the wise one. Not only does incorporating a business provide risk protection to its owners, it also provides many tax advantages that other business structures simply do not. Nevertheless, whether to incorporate a business or not must be an informed decision so make sure you do some research on the process. You'll find much of what you need on the Internet. And, nowadays you have many more options than the traditional one using an attorney. What type of incorporation (C-corp, S-corp, LLC)? Will you use an incorporating service or do-it-yourself? Answers to these questions and more will help you choose the option that best suits your business and whether incorporating a business is right for you.
Nate Smith is one of today's premier experts in saving you time and money on common legal matters. Forget the huge attorney fees, Nate will show you how you can incorporate, create a will and more while saving your hard-earned dollars in the process (http://legaldocumentsweb.com).

Aggregate Inventory Management

This article is also available on our website: PROACTION  Generating Best Practices. I

Overview

In spite of the great advances in industrial management in areas such as JIT, Flow Manufacturing, Lean Manufacturing, MRP/MRPII, ERP and Supply Chain Management, and now, Electronic Commerce, inventory investment management continues to be a major issue for many organizations. Installing the latest software and mouthing the most popular buzzwords is no guarantee of good inventory management. As with almost all Best Practices, it is the effective use of available tools by properly educated and trained people that creates the desired result.

This paper covers how to set up and maintain Aggregate Inventory Management for improved investment and operations management. It is a macro, top-down approach that complements a companys micro SKU (part number) level management techniques.

Definition, Goal and Objective

 Definition-- the APICS Dictionary defines Aggregate Inventory Management as Establishing the overall levels of inventory desired and implementing controls to ensure that individual replenishment decisions achieve this goal.

It includes:

 How to assess overall investment levels and set targets.
 How to identify inventory investment level drivers and help control them
 How to link aggregate inventory management macro strategy to micro controls and develop accountability
 Performance measurements
 Specific techniques, such as ABC analysis, control parameters, inventory buildup charts, and input-output control.

 Goal-- Helps manage assets and make money.

 Objective-- Optimize inventory levels within the parameters of service, cost, logistics, process and investment objectives/constraints. Inventory management should be exercised to keep the lowest level of inventory consistent with achieving the objectives. Too much inventory reduces Return on Investment and Return on Assets (lower profits). It also tends to increase expenses, in the form of interest payments, handling and storage, management, damage, loss, obsolescence, tracking, taxes, insurance, etc.

Although most managers, accountants and taxing authorities regard inventory as an asset, treating it as such for operational purposes may create liabilities. You have probably heard stories about factories working to keep people busy or maximize efficiency and other similar nonsense. If they are making inventory that is not needed now, they are often wasting money. If they work just to keep people busy, they are still consuming material, energy and other resources that may not earn adequate profits. They may use resources that could better be used for more immediate and profitable needs. If inventory is deployed improperly, it may create liabilities. A customer of one of our clients had branch managers who would hoard products at their remote branches so that they wouldnt run out. This created an excess of material in the wrong places.

How to Assess Inventory Investment Requirements

Survey

First, understand market, customer needs and service expectations; your own company needs, expectations, process, abilities; supplier abilities and mindset; industry norms and mindset; world-class best practices.

From this, you should learn how fast and reliably customers expect to get their shipments, what is involved to get raw materials and production completed, what the best in the industry are doing and plan to do, and what might be possible. For instance, if all competitors are shipping from stock, then you will either need to duplicate that feat, or determine how to manufacture very fast, or convince customers that your product is so great or so cheap that it is in their interest to wait while you make it to order. Or, you might figure out how to procure better or manufacture better in a way that allows you to carry less inventory.

The result of this step is to establish what industry inventory standards might be and what is possible. Make sure you have an apples-to-apples comparison: there may be significant differences among companies. For example: One company might stock finished goods, another one may sell it to another division or to a distributor.

Measure Current and Historical Inventory Levels and Performance

Measure current and historical company inventory levels and performance, not just overall statistics, but broken down into levels of responsibility, commodity, area, type (raw material, work-in-process, finished goods, consignment) and market. Do this to help isolate figures down to levels of accountability and to show inventory investment performance by market, process or even product line. You may find that your systems are unable to do that, meaning that it is past time to make changes to them, whether that be to replace them, modify them or put in separate inventory tracking and control systems (recommended as a last resort).

The result of this step is to establish how your own company is doing and has been doing with inventory management.

Establish Performance Metrics

Establish performance metrics - Inventory is usually measured in currency value, such as U.S. Dollars ($USD). Another, complementary way is to measure it in velocity. For example, you might measure it in turns which relates to how many times it moves or turns over per year. For example, if there was an average of $100 in inventory in the last year and annual cost of sales for the last year was $2000, that would be calculated as cost of sales ($2000)/average inventory ($100)= 20 turns.

More turns (or turnover) is usually good, provided that cost, service or quality arent unacceptably affected. If they are, the answer is not simply to increase inventory, but to try to improve the underlying drivers influencing it instead, if possible and cost-effective. There are variations of the turnover (this term should not be confused with the European turnover, which usually refers to total sales for a period) formula, mainly in addressing how to calculate average cost of goods sold or inventory.

Sometimes, turns are calculated by comparing full sales value with average inventory cost or even equivalent sales value. To maintain easily comparable figures, state all numbers in fully burdened costs, using industry standard overhead/burden calculations, unless this is contrary to the standards of your industry or locality. Hopefully, future standard world accounting practices may help to reduce confusion in this area.

It is becoming more common to measure inventory performance in days coverage instead of turnover. People seem to relate to it better.

Inventory and sales may also be commonly measured in more industry-friendly terms, such as tons (steel), bushels (corn), housing units (construction or real estate) or ounces (gold).

A further refinement is to stratify the inventory by Quality, as asserted by Gary Gossard of IQR International. The idea of classifying inventory as active, slow-moving or obsolete has been around for a long time. Constantly track it, to highlight any change in inventory quality or condition, such as a new requisition for an item which is already in excess or obsolete. The active, weighted good inventory not exceeding your days coverage target, divided by the total inventory, multiplied by 100, it equals the Inventory Quality Ratio (IQR) number. 33-40% is typical for mediocre companies. 66% is considered pretty good.

All of these numbers can be time-phased, to show changes over time, due, for example, to seasonal supply and demand changes, or planned improvements. These can then be applied in still more detail to the appropriate organizations, product lines, trade channels, warehouses, planning groups or other responsible entities and then monitored for results.

The numbers should be capable of being drilled down or up, from the entire enterprise level to an individual SKU (Stock-Keeping Unit) transaction or part number. Managers or employees should be able to look at total figures for their areas of responsibility and readily identify specific problem areas down to lower levels and finally to specific items, policies, orders and decisions that accounted for them.

Here are typical Inventory System Metrics, which should be broken down by organization/responsibility, area, type, commodity, market/product, and time phased, with targets and actual values:

 Inventory Turnover or Days Coverage
 Inventory value or other unit of measure, such as tons
 Inventory Quality, including IQR and summaries of amounts of each type
 Customer service level, expressed how the CUSTOMER perceives it

ABC Analysis

Perform an ABC analysis, a simple, common and powerful tool for inventory management. It is based on Paretos law of 80-20. The most common approach is to calculate demand in units, preferably for future periods, then calculate the total usage value at cost for each item (total cost of sales multiplied by units required) for a given future period. If future demand data are not available, the next best thing is to use history, but this wont work well for items with major swings in demand over time. Sequence these in descending value. Typically, the top 10 to 15% of items account for 75-85% of value (A items), the next 20-30% account for 10-20% of value (B items) and everything else accounts for the rest, about 60-70% of the items, usually about 5% of the total value (C items). Your inventory should be less than these percentages for the A items, because they are much more tightly controlled and a little higher for Bs and significantly higher for Cs.

Then compare the list to actual values in inventory, plus actual and planned commitments. The answers will often suggest immediate corrective actions!

An ABC list suggests what to concentrate on to control most of the inventory investment. What it doesnt tell you is that being short of a $.10 screw might prevent the shipment of a $5,000,000 radar unit, so ensure that there are control systems for all items, just control the expensive ones much more carefully. Err on the side of caution for the cheaper items, allowing a safety stock coverage or two bin approach to avoid stock outs, but keep inventory from getting out of control.

Create an Inventory Buildup Chart

Another good analysis tool is the inventory buildup chart. Use a standard x-y coordinate chart. Plot the cost build-up over time, by product group, with cost on the y (vertical axis) and time on the x (horizontal) axis. Normally, raw material cost accumulates first over time, followed by labor and overhead application. Allow for safety stocks, lot size inventory, transit stock, defects/rework/scrap, and normal finished goods and distribution pipeline stocking. Show the affect of consignment arrangements. Some people also treat accounts receivable as sort of a de facto inventory, until it is paid for. Once this chart is completed, show it around for shock value. Presented correctly, it will really make people think about the effect of constraints and decisions (just another form of constraint) on inventory. Then, work on changing the rules!

One company had a 14 month buildup curve, which was reduced to 4 months. At another company, the longest lead time material item accounted for only 20% of the product cost, so stocking only that item, instead of finished goods or instead of only reacting to orders, enabled them to radically reduce the response time for orders by 70%. It also added the flexibility of being able to use that raw material to make a number of different end items.

How to Identify and Control Inventory Drivers

Inventory drivers are things that tend to make inventory go up or down. Identify them and you will have some clue of why inventory changes. Understanding them is the beginning of gaining control. Ive stated things that would drive inventory up, e.g.: more SKUs. I refrain from stating the obvious: doing the opposite would reduce inventory. e.g.: reduce SKUs to reduce inventory.

Key Drivers are covered briefly, as follows:

Number of SKUs

The more items you have, the more inventory you will need, in most cases. If you sell 500 widgets a year of A, then replace it with 250/year of A and 250 of B, you will probably need to carry more inventory. Why: demand and supply variability and total economic order quantities are likelier to be higher for 2 items than for one.

The more SKUs in a product, the harder it is to bring matched sets of parts together at the same time. Because there are multiple items, with multiple vendors, kept and routed through multiple places or paths, with more opportunity for delays, defects, etc, more inventory will be needed.

The more operations there are and the longer that they take, the more inventory you will tend to have. More operations mean a longer supply chain. It may also mean differing lot sizes per operation and more places for delays and defects to occur. Process simplification helps reduce inventory.

The more facilities that inventory passes in and out of, the further apart those are and the harder they are to reach and pass material in and out of, the more inventory you will tend to have.

The more times inventory passes from the control of one system or organization to another and the less efficient the transfer is, the more inventory you will tend to have.

Lot/Batch Sizes

Lot/batch sizes greater than customer order delivery sizes tend to increase inventory. If customers order a product one at a time, but economics, handling or process considerations suggest that you make 1000 at a time, then you will have more inventory available than will be consumed per order, resulting in an accumulation of inventory. If you need to order things in cases, dozens, carloads, tons or weeks supply, but they are needed downstream in the supply chain in smaller increments, you will tend to accumulate more inventory.

The longer the lead time, the more inventory you tend to have. If something takes 16 weeks to get instead of 16 days, there is more inventory needed in process to cover the pipeline time. Whether it belongs to you or your vendor, it is increasing somebodys cost, which ultimately will affect your cost and your customers cost. Longer lead time also means more chance of running out or having something go wrong out while waiting for it, which is usually dealt with by having additional inventory.

Carrying cost

This refers to the cost of owning inventory. Lets look at what goes into inventory cost of ownership, frequently called the carrying cost and expressed in terms of percent cost of inventory valuation per year of ownership. For example, a 25% carrying cost (typical) would indicate that it costs about $.25 to own each $1.00 of inventory each year. These costs consist of:

 Cost of money  The cost of capital to the company or, in some cases the opportunity cost or return that might be earned on the money by applying it productively elsewhere. The cost of money has ranged anywhere from 6% to 18% in the USA in the last 25 years. Obviously, this has a very significant impact on investment strategy.
 Obsolescence  The risk of inventory never being used, or needing rework to make it usable, needs to be factored into the cost of owning INVENTORY. In theory (and practice), the larger the inventory is, and the longer it is held, the more likely engineering changes, customer preferences and technological changes will render that inventory unusable. In the clothing industry, it is not uncommon to see inventories depreciate as much as 90% when styles change. Certain portions of the electronics industry have problems with inventory becoming obsolete very quickly, due to technological changes.
 Shrinkage  A portion of inventory becomes unavailable to the owner due to loss, damage, theft or spoilage. The longer inventory is there and the more there is, the more likely this is to happen. Steps to prevent it only raise carrying costs in other areas, such as security, climate control, better control systems, recruiting policies, etc.
 Quality Factors  Allowances for yield, attrition, scrap and rework. This is really more of a function of the process than the amount of inventory invested and is more related to throughput, but is sometimes included as part of the aggregate inventory carrying cost.
 Technological or Price Obsolescence  Prices dont always go up. In fact, in industries such as electronics, prices often plummet due to constantly improving designs, product and process technology improvements. Therefore, it is desirable to minimize inventories in high-risk areas.
 Taxes  There are two dimensions to this: 1) in some areas, a tax is levied on inventories, so the more inventory, the more tax is paid. 2) inventory is regarded as an asset by most accounting and tax rules. Therefore, increasing inventories shows profits and profits are usually taxed, usually by multiple government entities.
 Insurance  The cost of carrying insurance on inventory needs to be considered, as well as insuring the space, equipment, people and other resources needed to control it.
 Space  Costly storage space sometimes occupies 25-30% of the total facility, when one considers raw material warehouses, stockrooms, work-in-process storage, receiving, shipping, outside warehouses, MRB and residual storage areas. Inventory reduction campaigns can help companies avoid the need to move to large facilities, or permit them to shut down or cut back existing facilities.
 Manpower  All of this inventory needs people to order, receive inspect, record, move, count, store, retrieve, post it to the ledger, etc. People are the largest or second largest expense (behind material) for most manufacturers.
 Record Keeping Systems  Software, procedures, equipment and paper must be used to track and control inventory.
 Material Handling/Storage Equipment  Conveyors, fork lifts, bar code readers, scales, automated storage and retrieval systems, trucks, carts, bins, racks, shelves must all be purchased, leased, maintained and cared for.
 Physical Inventories, Reconciliations  Must be conducted to ensure that inventories are properly accounted for and maintained.
 Transportation  Must be provided to move inventory in and out of the facility, to vendors, within the facility, to different workstations and storage areas.
 Energy  Heat, light, humidity control, air conditioning, refrigeration and fuel must be consumed to make all this happen.
 Inappropriate Lot Sizing - In inventory formulae, the carrying cost of inventory is often expressed as a flat percentage of the inventory value, for convenience of computations, but that is an oversimplification of reality. For instance, consider material handling/storage costs. Just because a dollar of inventory is added, doesnt mean that carrying costs go up, say, $.02. In reality the costs would not usually go up in a direct proportion at all, but only when we had to pay for an additional expense, or make the next capital investment in equipment or space to accommodate the inventory. So actually, most of these costs are step functions, rather than continuous curves.
We urge caution in the use of so-called EOQ (Economic Order Quantity) formulae in planning. While these can be useful guidelines in some cases, they can easily go awry and are hypersensitive to changes in carrying costs and order costs, which are usually no more than guesstimates, at best. We smile in amusement at PhDs made or lost on the study of such arcane calculations, often failing to consider basic realities such as; how much space and money do we have, anyway You can refer to Pauls book, Production & Inventory Management in the Technological Age, pages 137 to 139 for a detailed explanation of why this lot sizing method is weak and should be used with caution.

 Supply variation-- refers to the reliability of the supplier to deliver the desired units in the needed quantity, at the right time, at an acceptable quality level. If this cant be done reliably, then companies tend to carry a buffer (safety) stock to make up for the deficiencies in the supply system.

 Demand variation - refers to the ability to reliably forecast what the customer will require (whether that is an internal or an external customer). Lower reliability tends to encourage buffer (safety) stocks.

 Defects Extra inventory is often carried to allow for probable rejections. This is just a specialized form of safety stock for supply and demand buffering.

 Logistics constraints/transportation costs - This also sometimes falls under the heading of supply and demand variation and it certainly can affect it. For example, one of our clients transports parts by ocean freight to a plant in Portugal, or at least they do that if they dont have to ship by air to get them there faster. Because ships traveling between economical ports only leave every few weeks, a 20 or 40 foot long container is the most practical shipping size. A certain amount of time is required for packing, transportation to the terminal, Loading, transport, unloading, customs and transport to the consignee. These are very real logistics constraints that must be built into the pipeline portion of the inventory model.

Another company studied ships fresh flowers from Latin America to the U.S. Air freight is the only feasible way to handle shipment, due to shelf life and care issues. It results in a shorter pipeline and higher transportation costs, which end up either directly costed to inventory, or get rolled into overhead, or cost of salessame ultimate effect.

As unit costs rise, so will inventory, but the turns, or days coverage, will remain the same.

How to set Inventory Targets

After considering the current situation, drivers, and external situation, estimate what inventory levels should be, given certain sets of circumstances. There are impressive supply chain modeling tools to help you do this. Our experience is that developing an accurate detailed inventory behavior model is quite a chore to create and a major task to maintain, so we usually dont. Normally working on projects with limited budgets, we study past behavior and focus on the main drivers, seeking to change a few with the greatest potential impact to achieve assigned objectives- sort of a delta approach.

Dont let us talk you out of sophisticated modeling tools, though. They have their place. When there are very large amounts of money involved and/or tricky constraints to work around, modeling tools will sometimes help. Many of the detailed control methods presented below contain elements of modeling.

Warning: Calculating or modeling inventory behavior solely by using the rules and parameters will nearly always be wrong. Why: If, for example, you assume that inventory will be an average of  times the order quantity plus safety stock, youll most often be wrong. Actual supply and demand variability will differ. Defective items/customer returns may result in buildup. Unmatched sets of parts due to shortages will result in buildup. Generally, it is higher than the model would indicate.

Even the best laid plans can go off track if something changes unexpectedly- a major customer cuts orders, unexpected defects occur, requiring ad-hoc reaction, rather than careful, deliberate, advanced planning.

There are two major directions to approach inventory management from-- Top-Down and Bottom-Up. Most successful companies use a combination of both.

 Top-Down  this is the macro approach. Start with a goal, objectives, ABC (Pareto) analysis of estimated or historical usage, knowledge of overall processes and lead times. Set overall targets, by business unit at a minimum, preferably at a lower level, so that middle managers or even individual supervisors, work teams or administrative control personnel might be held more accountable. It takes more effort as the control is moved to a lower level.

Establish a tracking system, such as actual inventory versus target level. Compare numbers to actual sales, forecast. Monitor commitments and production plans against targets... Hold managers accountable for results and make them come back with reasons why targets cannot be met and solutions to the problems. Motivate them to solve underlying problems. Help them with problems outside of their scope of authority.

Another good tracking tool is Input-Output Control. Simply build a time-phased table of planned starting and ending inventories, showing starting, input, output and results. Then task employees to make the deltas happen and track the actual values per period.

 Bottom-UpLook at each item- determine cost, lead times, supply and demand reliability/variability, defect rate, transportation, storage, set-up/batch size considerations, buffers, process, handling considerations. Then set the proper planning methods and control parameters, to either default down from the enterprise, product line, commodity or department level to default down, or just establish them at the item/part level.

This takes a lot more effort than merely exercising Top-Down control, but it can deliver better results.

Educate and train people in inventory management and control approaches.

How to Control Inventory

After you do all your research and analysis, set targets and establish your control system, then you get to the hard part - actually making it happen.

Quick hits - Simply establishing the aggregate targets, understanding drivers, educating and training, setting up responsibility, establishing accountability and tracking results usually has significant effects. I have seen greater than 50% reductions from this alone. This can be the cheapest, fastest way of making some change happen, but it has a limited effect, because the approach lacks detail and wont make major permanent changes in the ways that the business works without additional actions.

What is Control - Control means to make something happen or to know why if it doesnt, so that something might be done about it. Using that definition, there is no such thing as an uncontrollable situation. Someone once told me that he couldnt control service inventory, because of unreliable vendor lead times. Nonsense! Unreliable lead times might be controlled by several strategies, such as: multiple sourcing, re-sourcing, safety stock, exhorting supplier to improve performance, ordering sooner, improving your own planning and reaction times, changing designs, alternate routing, training customers to order differently, having vendors stock raw materials. At least some of these would work in almost any situation.

Detailed Control Methods

Most of the detailed control methods that follow have some inventory management rationale built in, but it must be properly set-up and tuned for best use. Provide and implement control tools such as:
 Order on demand- Order only to fill customer orders. This is the most direct, intuitive method and tends to avoid excess inventory. It will only work if it can meet customers lead time and cost expectations. It works best for custom ordering and when it will result in delivery service meeting customers expectations.
In most cases, organizations must anticipate customer wishes to be successful. This often involves committing inventory in advance, to be able to deliver in time and to produce in economical quantities. So other techniques are often used, such as:
 Reorder point- Keep a certain amount available and on order to help ensure that it is available when needed, but not in excessive quantities.
 Min-max- This is a modified form of order point, with upper and lower limits established.
 Kanban- This is a more sophisticated type of reorder point. Instead of having a single order point, with a relatively large and lumpy order quantity, one replenishes a smaller quantity every time it is consumed. This method was popularized by its success at the Toyota Motor Company in Japan.
 MRP (Material Requirements Planning) - formalized in the 1950s by Dr. Joseph Orlicky, MRP uses a master schedule developed from a demand analysis of orders, forecast and production plans. It then considers available inventory, parts requirements calculated from the bill of materials, then factors in open purchase orders, lead times, logistical considerations, safety stock and other ordering rules, to develop a materials purchasing and factory schedule to meet planned and actual demand.
In current times, a companys MRP system is often a subset of its ERP (Enterprise Resource Planning) or Supply Chain Management System, which incorporates MRP as only one portion of an overall Enterprise level system. MRP is not always the most appropriate approach for all environments. In recent years, it has been modified successfully, by incorporating techniques of Kanban, JIT, Lean Manufacturing, Repetitive Scheduling, Theory of Constraints and others.
 DRP (Distribution Requirements Planning)  this is a specialized form of MRP, for distribution networks. It uses the same principles, but may also consider the dynamics of multi-level distribution networks, service level planning, cross-docking, shipment staging, truck loading, inventory deployment optimization and other considerations.
 Supply Chain Planning/Optimization- This is the next level of sophistication for MRP and DRP. It creates a model of the supply chain, which may include suppliers, manufacturing, various levels of distribution and even monitoring of inventory through one or more levels of customer ownership.
 Repetitive scheduling- Designed for continuous flow production.
 Process monitoring/control - Control of an ongoing, often continuous, process, usually by monitoring and controlling process parameters, such as raw material properties, desired attributes, temperature, pressure, speeds, viscosity, finish, byproducts, etc.
 Safety stock/safety lead time - Most of the above techniques might be enhanced by building in supply and demand buffers to allow for fluctuations/uncertainty of what will be needed and when and what supply will arrive and when. It can be done by adding on a fixed quantity or time coverage. The trouble with this approach is that people tend to make the wrong allowances, usually on the high side. This inflates inventory, may actually confuse priorities and use up needed capacity, by working on things not actually needed. The best approach is to try to reduce process variation for supply and demand, so that less safety stock is needed.
 Vendor-Managed Inventory - a form of delegation that is proving to be quite popular and sometimes very successful. One provides the supplier with demand and logistics data and makes him responsible for ensuring that the right quantities are available at the right time and place for you to meet demand. It needs cooperation, monitoring and common interests and objectives to be successful.
 Input/Output - Dont forget to implement the input-output method, described earlier as a tool to help make reductions.

Pitfalls of using control parameters

With the use of MRP, MRPII, ERP and now Supply Chain Management  systems, there are more opportunities to improve inventory management, but also more chances to lose control! Unless there is a clearly stated Aggregate Inventory Management approach imbedded in the system, through education, training and parameters, yes- I said parameters!, you will likely fail.

War story from George Miller: Years ago, I worked for a specialty niche MRPII/ERP company. After I left for the consulting world, a customer of that company called to inform me that the software wasnt working and summoned me to come and help them. After only a day on site, I told them that the problem was that the system was carrying out their instructions at the speed of light, spewing forth recommendations to acquire inventory, based on their unrealistic parameters. You see, most of these systems have various gauges and levers, to set control parameters to tailor the operation of the system to the company, products and process. These might be set, for example, system-wide, but can usually be overridden at the business unit, plant, department, product line and/or part number level. Each level normally defaults down to the lower level, unless you override it.

For example, they used unrealistically long process times in the item master planning records and had safety stock and scrap factors planned at multiple levels in the bill of material, pyramiding (increasing) demand calculations considerably. No surprise then, except to them, that they were well upon their way to doubling their inventory investment in record time, without significant benefits. The prescription was:
1. The management team to get personally involved in setting the system parameters.
2. Educate employees in inventory management concepts and train them in proper use of system tools.
3. Establish and monitor a special report to assess the effect of order modifier parameters, such as safety stock, scrap and attrition factors, order planning method, order quantity rules, order multiples, lead time, review time, inspection time.
Conclusion: Inventory can be systematically managed. It doesnt happen on its own. Needed is a rationale, a plan, education, training, organization, tools, policies, procedures and management willpower.

References:

1. APICS Dictionary, 7th Edition, APICS, Falls Church, VA
2. Production and Inventory Control, Second Edition, George W. Plossl, Prentice Hall, 1985 (originally 1967)
3. Production and Inventory Management, Second Edition, Fogarty, Blackstone, Hoffman, Southwestern Publishing, Cincinnati, Ohio, 1991
4. Inventory Reduction, George Miller, 1990.
5. IQR Manual, IQR International (Proprietary document), San Juan Capistrano, CA